Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2023

Fair value of financial instruments

FASB ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 also establishes a framework for measuring the fair value of assets and liabilities according to a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that are derived from assumptions based on management’s estimate of assumptions that market participants would use in pricing the asset or liability based on the best information available under the circumstances.

The hierarchy is broken down into the following three levels, based on the reliability of inputs:

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs for assets or liabilities that are derived from assumptions based on management’s estimate of assumptions that market participants would use in pricing the assets or liabilities.

The Company records the fair values of financial assets and liabilities on a recurring and nonrecurring basis using the following methods and assumptions:


Investment securities						Investment securities are recorded at fair value on a recurring basis. Fair values for securities are based on quoted market prices, where available. If quoted prices are not available, fair values are based on quoted market prices of similar instruments or are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the pricing relationship or correlation among other benchmark quoted securities. Investment securities valued using quoted market prices of similar instruments or that are valued using matrix pricing are classified as Level 2. When significant inputs to the valuation are unobservable, the available-for-sale debt securities are classified within Level 3 of the fair value hierarchy. Where no active market exists for a security or other benchmark securities, fair value is estimated by the Company with reference to discount margins for other high-risk securities.

Loans held for sale						Mortgage loans held for sale are carried at fair value determined using current secondary market prices for loans with similar characteristics, that is, using Level 2 inputs. GNMA optional repurchase loans recorded as held for sale loans are carried at their principal balance. For commercial loans held for sale, fair value is determined using an income approach with various assumptions including expected cash flows, market discount rates, credit metrics and collateral value when appropriate. As such, these are considered Level 3.

Derivatives						The fair value of the Company's interest rate swap agreements to facilitate customer transactions are based upon fair values provided from entities that engage in interest rate swap activity and is based upon projected future cash flows and interest rates. The fair value of interest rate lock commitments associated with the mortgage pipeline is based on fees currently charged to enter into similar agreements, and for fixed-rate commitments, the difference between current levels of interest rates and the committed rates is also considered. The fair values of the Company's designated cash flow and fair value hedges are determined by calculating the difference between the discounted fixed rate cash flows and the discounted variable rate cash flows. The fair values of both the Company's hedges, including designated cash flow hedges and designated fair value hedges are based on pricing models that utilize observable market inputs. These financial instruments are classified as Level 2.

OREO						OREO is comprised of commercial and residential real estate obtained in partial or total satisfaction of loan obligations and excess land and facilities held for sale. OREO acquired in settlement of indebtedness is recorded at the lower of the carrying amount of the loan or the fair value of the real estate less costs to sell. Fair value is determined on a nonrecurring basis based on appraisals by qualified licensed appraisers and is adjusted for management’s estimates of costs to sell and holding period discounts. The valuations are classified as Level 3.

Mortgage servicing rights						MSRs are carried at fair value. Fair value is determined using an income approach with various assumptions including expected cash flows, market discount rates, prepayment speeds, servicing costs, and other factors. As such, MSRs are considered Level 3.

Collateral- dependent loans						Collateral-dependent loans are loans for which, based on current information and events, the Company has determined foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the loan to be provided substantially through the operation or sale of the collateral and it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collateral-dependent loans are classified as Level 3.

The balances and levels of the assets and liabilities measured at fair value on a recurring basis as of December 31, 2023 and 2022 are presented in the following tables:


At December 31, 2023	Quoted prices in active markets for identical assets (liabilities) (level 1)		Significant other observable inputs (level 2)		Significant unobservable inputs (level 3)		Total
Recurring valuations:
Financial assets:
Available-for-sale securities:
U.S. government agency securities	$	—	$	203,956	$	—	$	203,956
Mortgage-backed securities - residential	—		896,971		—		896,971
Mortgage-backed securities - commercial	—		16,961		—		16,961
Municipal securities	—		242,263		—		242,263
U.S. Treasury securities	—		108,496		—		108,496
Corporate securities	—		3,326		—		3,326

Total securities	$	—	$	1,471,973	$	—	$	1,471,973
Loans held for sale, at fair value	$	—	$	46,618	$	—	$	46,618
Mortgage servicing rights	—		—		164,249		164,249
Derivatives	—		34,738		—		34,738
Financial Liabilities:
Derivatives	—		38,215		—		38,215


At December 31, 2022	Quoted prices in active markets for identical assets (liabilities) (level 1)		Significant other observable inputs (level 2)		Significant unobservable inputs (level 3)		Total
Recurring valuations:
Financial assets:
Available-for-sale securities:
U.S. government agency securities	$	—	$	40,062	$	—	$	40,062
Mortgage-backed securities - residential	—		1,034,193		—		1,034,193
Mortgage-backed securities - commercial	—		17,644		—		17,644
Municipal securities	—		264,420		—		264,420
U.S. Treasury securities	—		107,680		—		107,680
Corporate securities	—		7,187		—		7,187
Equity securities, at fair value	—		2,990		—		2,990
Total securities	$	—	$	1,474,176	$	—	$	1,474,176
Loans held for sale, at fair value	$	—	$	82,750	$	30,490	$	113,240
Mortgage servicing rights	—		—		168,365		168,365
Derivatives	—		48,769		—		48,769
Financial Liabilities:
Derivatives	—		63,229		—		63,229

The balances and levels of the assets measured at fair value on a nonrecurring basis as of December 31, 2023 and 2022 are presented in the following tables:


At December 31, 2023	Quoted prices in active markets for identical assets (liabilities (level 1)		Significant other observable inputs (level 2)		Significant unobservable inputs (level 3)		Total
Nonrecurring valuations:
Financial assets:
Other real estate owned	$	—	$	—	$	2,400	$	2,400
Collateral-dependent net loans held for investment:
Commercial and industrial	—		—		12,338		12,338
Construction	—		—		203		203
Residential real estate:
1-4 family mortgage	$	—	$	—	$	429	$	429





Consumer and other	—		—		71		71
Total collateral-dependent loans	$	—	$	—	$	13,041	$	13,041


At December 31, 2022	Quoted prices in active markets for identical assets (liabilities) (level 1)		Significant other observable inputs (level 2)		Significant unobservable inputs (level 3)		Total
Nonrecurring valuations:
Financial assets:
Other real estate owned	$	—	$	—	$	2,497	$	2,497
Collateral-dependent net loans held for investment:


Residential real estate:
1-4 family mortgage	$	—	$	—	$	366	$	366

Commercial real estate:

Non-owner occupied	—		—		2,494		2,494

Total collateral-dependent loans	$	—	$	—	$	2,860	$	2,860

Commercial loans held for sale

As of December 31, 2022, the Company had a portfolio of acquired commercial loans. There were no such loans outstanding as of December 31, 2023. These commercial loans were measured at fair value. As such, these loans were excluded from the ACL.

The following tables set forth the changes in fair value associated with this portfolio for the years ended December 31, 2023, 2022, and 2021:











	Year Ended December 31, 2023
	Principal Balance		Fair Value Discount		Fair Value
Carrying value at beginning of period	$	34,357	$	(3,867)	$	30,490
Change in fair value:
Paydowns and payoffs	(28,376)		—		(28,376)
Write-offs to discount	(5,981)		5,981		—
Changes in valuation included in other noninterest income	—		(2,114)		(2,114)
Carrying value at end of period	$	—	$	—	$	—











	Year Ended December 31, 2022
	Principal balance		Fair Value discount		Fair Value
Carrying value at beginning of period	$	86,762	$	(7,463)	$	79,299

Change in fair value:
Paydowns and payoffs	(43,676)		—		(43,676)
Write-offs to discount	(8,729)		8,729		—
Changes in valuation included in other noninterest income	—		(5,133)		(5,133)
Carrying value at end of period	$	34,357	$	(3,867)	$	30,490


	Year Ended December 31, 2021
	Principal balance		Fair Value discount		Fair Value
Carrying value at beginning of period	$	239,063	$	(23,660)	$	215,403

Change in fair value:
Paydowns and payoffs	(141,002)		—		(141,002)
Write-offs to discount	(8,563)		8,563		—
Changes in valuation included in other noninterest income	(2,736)		7,634		4,898
Carrying value at end of period	$	86,762	$	(7,463)	$	79,299

In addition to the gain of $4,898 recognized on the change in fair value of the portfolio during the year ended December 31, 2021, the Company recognized an additional gain of $6,274 related to the payoff of a loan that had been partially charged off prior to acquisition of the portfolio.

The significant unobservable inputs (Level 3) used in the valuation and changes in fair value associated with the Company's mortgage servicing rights for the years ended December 31, 2023, 2022, and 2021 are detailed at Note 8, “Mortgage servicing rights.”

The following tables present information as of December 31, 2023 and 2022 about significant unobservable inputs (Level 3) used in the valuation of assets measured at fair value on a nonrecurring basis:

December 31, 2023

Financial instrument

Fair Value

Valuation technique

Significant
unobservable inputs

Range of
inputs

Collateral-dependent net loans
held for investment

13,041

Valuation of collateral

Discount for comparable sales

10%-61%

Other real estate owned

2,400

Appraised value of property less costs to sell

Discount for costs to sell

0%-15%

December 31, 2022

Financial instrument

Fair Value

Valuation technique

Significant
unobservable inputs

Range of
inputs

Collateral-dependent net loans
held for investment

2,860

Valuation of collateral

Discount for comparable sales

10%-35%

Other real estate owned

2,497

Appraised value of property less costs to sell

Discount for costs to sell

0%-15%

Fair value for collateral-dependent loans is determined based on appraisals performed by qualified appraisers and reviewed by qualified personnel. Fair value of the loan's collateral is determined by third-party appraisals, which are then adjusted for estimated selling and closing costs related to liquidation of the collateral. Collateral-dependent loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on changes in market conditions from the time of valuation and management's knowledge of the borrower and borrower's business. As of December 31, 2023 and 2022, total amortized cost of collateral-dependent loans measured on a nonrecurring basis amounted to $18,166 and $3,054, respectively. The allowance for credit losses is calculated as the amount for which the loan’s amortized cost basis exceeds fair value.

Other real estate owned acquired in settlement of indebtedness is recorded at fair value of the real estate less estimated costs to sell. Subsequently, it may be necessary to record nonrecurring fair value adjustments for declines in fair value. Any write-downs based on the asset's fair value at the date of foreclosure are charged to the allowance for credit losses.

Appraisals for both collateral-dependent loans and other real estate owned are performed by certified appraisers whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the lending administrative department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry wide statistics. Collateral-dependent loans that are dependent on recovery through sale of equipment, such as farm equipment, automobiles and aircrafts are generally valued based on public source pricing or subscription services while more complex assets are valued through leveraging brokers who have expertise in the collateral involved.

Fair value option

The following table summarizes the Company's loans held for sale as of the dates presented:



	December 31,
	2023		2022
Loans held for sale under a fair value option:
Commercial loans held for sale	$	—	$	30,490

Mortgage loans held for sale	46,618		82,750
Total loans held for sale, at fair value	46,618		113,240
Loans held for sale not accounted for under a fair value option:
Mortgage loans held for sale - guaranteed GNMA repurchase option	21,229		26,211
Total loans held for sale	$	67,847	$	139,451

Mortgage loans held for sale

Net losses of $121, $13,677, and $16,976 resulting from fair value changes of mortgage loans were recorded in income during the years ended December 31, 2023, 2022, and 2021, respectively. The amount does not reflect changes in fair values of related derivative instruments used to hedge exposure to market-related risks associated with these mortgage loans. The net change in fair value of these loans held for sale and derivatives resulted in net losses of $1,815, $17,633, and $33,284 for the years ended December 31, 2023, 2022, and 2021, respectively. The change in fair value of both loans held for sale and the related derivative instruments are recorded in “Mortgage banking income” in the consolidated statements of income. Election of the fair value option allows the Company to reduce the accounting volatility that would otherwise result from the asymmetry created by accounting for the financial instruments at the lower of cost or fair value and the derivatives at fair value.

The Company’s valuation of mortgage loans held for sale incorporates an assumption for credit risk; however, given the short-term period that the Company holds these mortgage loans held for sale, valuation adjustments attributable to instrument-specific credit risk is nominal.

The following table summarizes the differences between the fair value and the principal balance for loans held for sale and nonaccrual loans HFS measured at fair value as of December 31, 2023 and 2022:


December 31, 2023	Aggregate fair value		Aggregate Unpaid Principal Balance		Difference
Mortgage loans held for sale measured at fair value	$	46,618	$	45,509	$	1,109




December 31, 2022	Aggregate fair value		Aggregate Unpaid Principal Balance		Difference
Mortgage loans held for sale measured at fair value	$	82,750	$	81,520	$	1,230
Commercial loans held for sale measured at fair value	21,201		22,126		(925)

Nonaccrual commercial loans held for sale	9,289		12,231		(2,942)

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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